Alert – Proposed amendments announced to the existing regime imposing personal liability on directors for certain company tax

23 April 2012

On 18 April the government released for public comment exposure draft legislation for the Tax Laws Amendment (2012 Measures No. 2) Bill 2012: Companies' non-compliance with PAYG withholding and superannuation guarantee obligations. The draft legislation proposes amendments to the current regime in the Taxation Administration Act 1953 (Cth) which imposes personal liability on directors for certain unpaid company tax in some circumstances. Those existing rules are known as the director penalty regime.

The proposed legislation, explanatory memorandum and accompanying fact sheets can be found at the Treasury website. Comments on the proposed legislation are due by 2 May 2012.

Background

In 2011 the government introduced amendments to Schedule 3 of the Tax Laws Amendment (2011 Measures No 8) Bill 2011 (2011 Bill). In its report on the 2011 Bill, the House of Representatives Economics Committee recommended that Schedule 3 to the 2011 Bill be deleted for further consultation. The 2011 Bill proposals and the current director penalty regime are discussed in our Alert - Liability for directors for certain company tax: proposed reform.

The proposed legislation revives the deleted Schedule 3 and contains a number of changes from the proposals in the 2011 Bill and is proposed to be effective from the date of Royal Assent.

Summary of proposed amendments

The new proposed legislation proposes to extend the coverage of the existing director penalty regime to the superannuation guarantee charge. This is the same as was in the 2011 Bill. This also leads to other proposed changes to allow for similar provisions to arise in respect of the superannuation guarantee charge as for PAYG liabilities. For example, under the existing rules where PAYG is unpaid and is of an uncertain figure, for the purposes of the director penalty regime the Australian Taxation Office can estimate a company's unpaid PAYG withholding liabilities and the director can by way of statutory declaration set out the actual amounts if the estimate is wrong. The proposed legislation provides for the same provisions to apply to unpaid superannuation guarantee charge for the purposes of the director penalty regime.

Under the current director penalty regime, a new director may be liable for particular outstanding tax debts of their company if they fail to take action within 14 days of becoming a director. Amendments are proposed to extend the no-liability period to 30 days. This is stated to be to enable new directors to have more time to familiarise themselves with corporate accounts before potential liability arises.

There are also proposals to change the way the Australian Taxation Office can collect tax under the director penalty regime. Under the current law, directors are entitled to PAYG withholding credits withheld by the company on director fees, regardless of whether the company has paid all PAYG withholding amounts to the Commissioner. The proposed legislation provides that, where a company fails to pay PAYG withholding amounts to the Commissioner, the Australian Taxation Office has a discretion to reduce a director's entitlement to PAYG withholding credits – and it should be noted this includes former directors where there was unpaid PAYG during the period of their directorship and where they had director's fees upon which PAYG was withheld. In addition, directors and their associates (which include family members potentially) who are entitled to PAYG withholding credits, may be liable to pay PAYG withholding non-compliance tax essentially cancelling the benefit of any such PAYG credits. These proposals were in the 2011 Bill and were controversial. We expect them to continue to be of concern to directors, especially the extension to associated persons.

The existing rules provide for the director penalty regime to apply on service of a director penalty notice on a director by the Australian Taxation Office, and for recovery proceedings to be taken 21 days after the notice was issued. The new proposals include additional means being available to serve a director penalty notice on a director, allowing the Australian Taxation Office to serve a director at the director's tax agent's address. Controversial proposals in the 2011 Bill to remove that 21 day notice period and the director penalty notice have not been proceeded with in the new proposed legislation.

There is a proposal to limit one of the potential defences under the existing director penalty regime. Currently a director can extinguish potential personal liability by appointing an administrator or beginning the winding up of the company before the 21 day period following the service of a director penalty notice has passed. The proposed legislation provides that a director's personal liability can only be extinguished in this way within 3 months of the due date of the unpaid debt(s), or, for new directors, within 3 months of their becoming a director. This is stated to be to prevent phoenix activity, where (for example) a company intentionally accumulates a tax debts, a director penalty notice is served, and the company enters into liquidation prior to the end of the 21 day notice period. Other defences may be available to directors in those circumstances.

There is an additional defence proposed for directors in circumstances where the company treated the Superannuation Guarantee (Administration) Act 1992 as applying to the matter in a way that was reasonably arguable, and where the company took reasonable care in applying that Act to the matter. This might for instance arise in cases where there was a reasonable view taken that a worker was a contractor and not an employee, and this is why the superannuation guarantee charge was unpaid.

The current defences including that relating to illness, or other reason, such that the director was not involved in the management of the company, and it was reasonable for the director to not be involved, remain unchanged. In some cases however, where the Australian Taxation Office has sought to recover the director penalty from a third party (for example using a garnishee order over funds due to the director), the new proposed legislation provides that any defence raised by the director to the director penalty notice must be raised within 60 days of notification being given to the director that recovery has occurred or is occurring from a third party.

Next steps

Comments are called for on the proposed legislation due by 2 May 2012. This timeframe is obviously far too short given the importance of these proposals. However, the government has indicated that it intends to introduce the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 in the Winter 2012 sittings of Parliament and pass the bill this year and the tight consultation timeframe also reflects that earlier consultation has occurred.

To minimise the risk of these provisions applying to directors, it will be important for companies to ensure that their corporate governance processes include oversight of tax compliance management and tax risk governance.